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The Crude Oil Futures Market Structure

Source: OPEC 7/24/2013, Location: Europe

The Nymex WTI market structure continued its narrowing trend for the fourth month in a row. In fact, it flipped into a backwardation starting in the second half of June and remains at this status to date. Temporary factors were at play.

Heavy flooding in Canada and a refinery restart near Chicago have cut crude shipments to Cushing, providing support to WTI. These firmer prompt fundamentals pushed first month Nymex WTI to trade at a premium of around 10¢/b to the second month during the last 10 days of June. Moreover, the premium to further months widened out by over $1 in anticipation of further pipeline debottlenecking from the WTI futures pricing point at Cushing. Positive US economic data also supported the WTI market. On a monthly average basis, the Nymex WTI contango market structure narrowed by half compared to the previous month to 10¢/b, a level not seen since October 2011.

ICE Brent backwardation remained weak and did not change over the month amid weak demand from European refiners, ample supply of Atlantic Basin light sweet crudes and resumption of North Sea output. A lack of prompt demand pushed nearmonth prices below forward months, leaving the market in a shallow contango. In June, the spread between the second and first month ICE Brent contract averaged around 25¢/b, the same as in the previous month, and noticeably lower than levels experienced earlier this year when the backwardation was at almost $1/b.

Front-month Nymex WTI gained more ground on ICE front-month Brent, narrowing the Brent-WTI spread to a 2-and-a-half-year low of minus $7.54/b.

The Nymex WTI benchmark found support as US refineries returned from maintenance, North Sea output resumed, and signs of a strengthening US economy contrasted with weak EU data. WTI has been further strengthened by higher refinery throughputs and cuts in Canadian production that have reduced supplies to the midcontinent. More crude is moving out of the midcontinent, easing the pressure on storage at Cushing. Prices of local grades such as Light Louisiana Sweet (LLS) are falling relative to WTI, as crude stocks build on the US Gulf coast. Rising production from the Eagle Ford shale formation in Texas, as well as more shipments from the midcontinent, have left Gulf coast refiners with an excess of light crude supplies. LLS traded at around $8/b above WTI, compared with $22/b three months ago.

In contrast, ICE Brent has been in the $100–105/b range for the past two months, with reduced supplies due to offshore maintenance offset by weak demand from European refiners.

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